Question

Explain why this is interesting.

I was tasked to provide a summary of how reliable is an inverted curve in anticipating a recession; and to also discuss the variability of a yield curve and a subsequent recession. In researching the 10-year Treasury Yield, and the three-month Treasury Bill Rate and graphing it, the data was interesting. During periods of non-recession it seems both statistics are similar and related. I wasn’t aware until the reading the text, that the relationship between the slope of the yield curve and the stance of monetary policy in predicting recessions has been examined with mixed results. I have considered it’s important to gauge the status of monetary policy in order to differentiate between the policy rate and a time varying, rather than the constant, or even a neutral rate.

Answer 1

Inverted yield curve is deemed as a predictor of an impending recession but it is not always inverting when there is a recession as inversion in yield curves happens many of the time for the short duration, because of trading purposes and reactions due to monetary policies so it can never be completely accurate as it has predicted 9 out of last 12 recessions but not always when it is inverted ,it means that there is a recession on its way.

Status of monetary policy in order to differentiate between policy rate and time varying rather than constant or neutral rate because monetary policies are always proactive in nature and those were charged with maintenance of the monetary policy are always looking to control the damage which can be done by the recession as it can be seen in this case when the Federal Reserve has proactively cut the interest rate to zero in anticipation of an impending recession.